Former Shareholders of CardioSpectra, Inc. v. Volcano Corporation and Does 1-10

Filing 31

ORDER by Judge Yvonne Gonzalez Rogers granting 13 Motion to Dismiss with Leave to Amend. (fs, COURT STAFF) (Filed on 8/6/2012)

1
2
3

ED
OURT
UNITE STATES D ISTRICT CO

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NORTHE DISTRIC OF CALIF
ERN
CT
FORNIA

5
6
7
8

RMER SHARE
EHOLDERS OF
O
FOR
CAR SPECTR , INC.,
RDIO
RA

9

Plaintiffs,

C
Case No.: 12
2-CV-01535 YGR
O RDER GRAN
NTING MOTION TO DISM
MISS
W ITH LEAVE TO AMEND
E
D

10

vs.
Northern District of California

United States District Court

11
LCANO CORPORATION and DOES 1 - 10,
a
VOL

12

Defe
endant(s).
13

Plaintiff former sha
fs,
areholders of CardioSpe
o
ectra, Inc. (“C
CardioSpect
tra”), bring t action fo
this
or

14
15

brea of contra against Defendant Vo
ach
act
D
olcano Corporation (“Vo
olcano”) for failing to m its
meet

16

cont
tractual oblig
gation to me certain “m
eet
milestones” following a merger. Pla
aintiffs allege three

17

claim (1) Brea of Writte Contract; (2) Breach o the Implie Covenant of Good Fa and Fair
ms:
ach
en
of
ed
t
aith

18

Dea
aling; and (3) Breach of Fiduciary Du
)
F
uty.

19

Volcano has filed a Motion to Dismiss the C
o
M
D
Complaint fo failure to s
or
state a claim upon which
m
h

20

relie can be gra
ef
anted on the grounds that it has no du
uties or oblig
gations relat
ting to the su
ubject matter
r

21

of th lawsuit. The Court held oral argu
his
h
ument on Ju 31, 2012.
uly
.
Having carefully con
c
nsidered the papers subm
mitted, the ar
rgument of c
counsel, and the pleadings
d

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23

in th action, an for the rea
his
nd
asons set for below, th Court here GRANTS the Motion to Dismiss
rth
he
eby
S
n

24

WIT LEAVE TO AMEND.
TH

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I.

26

BACKG
GROUND
Defenda Volcano develops and manufactu specializ medical devices that are designe
ant
d
d
ures
zed
t
ed

27

to fa
acilitate endo
ovascular pr
rocedures, en
nhance the d
diagnosis of v
vascular and structural h
d
heart disease
e,

28

and guide optim therapies, particularly in the area of cardiova
mal
y
a
ascular care. On Decemb 7, 2007,
ber

1

Volcano and CardioSpectra entered into an Agreement and Plan of Merger (“Agreement”) through

2

which Volcano acquired CardioSpectra. See FAC ¶¶ 2-3; Aftahi Decl. ¶ 2, Ex. A, Agreement at 1.

3

Prior to merger with Volcano, CardioSpectra was in the business of developing Optical Coherence

4

Tomography (“OCT”) technology. FAC ¶¶ 9, 15.

5

The Agreement required Volcano to pay $25.2 million for the acquisition of CardioSpectra

6

and required Volcano to pay additional compensation upon achievement of specified “Milestones.”

7

FAC ¶¶ 3, 21. In order to protect CardioSpectra’s shareholders’ interests, the Agreement imposed

8

obligations on Volcano “to act in good faith and to use commercially reasonable efforts to cause each

9

of the Milestones to be achieved on or before” the specified date for each. Id. ¶ 5. The FAC

10
11

Northern District of California

United States District Court

12
13
14
15
16
17
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19
20
21

summarizes the Milestone payments as follows:
Milestone 1: payment of $11 million upon approval by U.S., Japanese, or European
regulators of a first-generation OCT System on or before December 31, 2009.
Milestone 2: payment of $10 million upon approval by U.S. regulators of a
“productized” OCT System on or before December 31, 2010.
Milestone 3: payment of $10 million upon cumulative cash sales of OCT Products
(including consoles (OCT laser light sources, processors, application software, data
storage devices, printers and other related components), patient interface modules and
pull-back devices (also referred to as a PIM) and OCT catheters or wands used to
conduct visualization) totaling $10 million within 3 years of U.S. regulatory approval
of a “productized” OCT System or otherwise on or before December 31, 2013.
Milestone 4: payment of $7 million upon cumulative cash sales of OCT Products
(including consoles (OCT laser light sources, processors, application software, data
storage devices, printers and other related components), patient interface modules and
pull-back devices (also referred to as a PIM) and OCT catheters or wands used to
conduct visualization) totaling $25 million within 4 years of U.S. regulatory approval
of a “productized” OCT System or otherwise on or before December 31, 2014.
Id. ¶ 21.
Volcano achieved the first Milestone (“Milestone 1”) and paid $11 million to Plaintiffs. Id. ¶

22

25. The second Milestone (“Milestone 2”) was to be triggered by the achievement of certain

23

regulatory approvals for a defined OCT System, whereas the third and fourth Milestones

24

(respectively, “Milestone 3” and “Milestone 4”) was to be triggered upon the achievement of certain

25

sales volumes for the specified OCT Products. Id. ¶ 21; Agreement § 2.5(a)(ii)-(iv). If and when

26

Milestones 2-4 were achieved, Volcano could be obligated to pay up to $27 million in additional

27

Milestone Merger Consideration payments. Id. ¶¶ 8, 21; Agreement § 2.5(a).

28

2

Although Milestone 2 – regulato approval for the “Ge
h
ory
l
eneration 1a OCT System – has not
m”

1
2

been achieved, Plaintiffs allege that they are entitled to the Mile
n
P
y
d
estone 2 pay
yment of $10 million
0

3

beca
ause Volcano allegedly failed to mee its contrac
f
et
ctual standar of perform
rd
mance under Section
r

4

2.5( of the Ag
(c)
greement. FA ¶¶ 6, 30. Plaintiffs a
AC
.
allege that V
Volcano has a
achieved sal goals
les

5

requ
uired to trigg Milestones 3 and 4 an that Plain
ger
nd
ntiffs are the
erefore entitled to payme of $10
ents

6

mill
lion under Se
ection 2.5(b)
)(iii) – Miles
stone 3 – and $7 million under Secti 2.5(b)(iv – Mileston
d
n
ion
v)
ne

7

4. Id. ¶¶ 7, 31.
I

8

II.

LEGAL STANDAR
L
RD
A motion to dismiss under Rule 12(b)(6) tes the legal s
n
sts
sufficiency o the claims alleged in
of
s

9

mate
erial fact are taken as tru Johnson v. Lucent T
e
ue.
Techs., Inc., 6 F.3d 100 1010 (9th Cir. 2011).
653
00,
h

12

Northern District of California

the complaint. Ileto v. Gloc Inc., 349 F.3d 1191, 1
c
I
ck,
1199-1200 (
(9th Cir. 200
03). All alleg
gations of

11

United States District Court

10

To survive a mo
s
otion to dism
miss, “a comp
plaint must c
contain suffi
icient factual matter, acc
cepted as true,

13

to ‘s
state a claim to relief tha is plausible on its face.’” Ashcroft v. Iqbal, 55 U.S. 662, 678 (2009)
m
at
ft
56

14

(quo
oting Bell At Corp. v. Twombly, 550 U.S. 544, 557 (2007)).
tl.
T

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III.

DISCUS
SSION

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A.

COUNT I: BREACH OF WRITTEN CO
R
ONTRACT

17

ct
Under Delaware law 1 to state a cause of act
D
w,
tion for breac of contrac a plaintiff must allege
ch
f
e

18

three elements: “first, the ex
xistence of the contract, whether exp
t
press or imp
plied; second the breach
d,

19

n
n
y
ct;
,
nt
o
ff.” VLIW
of an obligation imposed by that contrac and third, the resultan damage to the plaintif

20

Tech LLC v. Hewlett-Pack
h.,
H
kard Co., 840 A.2d 606, 612 (Del. 20
0
003).
Plaintiff do not alle they were signatories to the Agre
fs
ege
e
s
eement2 and Plaintiffs, w are
who

21
22

form sharehol
mer
lders of Card
dioSpectra, do not sue in their capaci as former shareholde or allege
d
n
r
ers
ity

23

that they were sh
hareholders at the requis time.
site

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25
26

1

The parties agre that, under the Agreeme Delaware law governs. The choiceee
ent,
.
-of-law provi
ision in the
eement provid that it “sh be constru in accord
des
hall
ued
dance with, an governed in all respects by, the
nd
Agre
inter laws of th State of De
rnal
he
elaware . . ..” Agreement §§ 13.9(a), 13
3.16.
2

27
28

On Volcano, Corazon Acqu
nly
C
uisition, Inc., CardioSpectr and Christ
tra,
topher E. Ban and Paul C
nas
Castella, in
their capacities as Shareholder Representa
r
s
rs’
atives, were p
parties to the A
Agreement. N
Neither Bana nor Castella
as
a
sue in their capac as Shareh
i
city
holders’ Repre
esentatives. B
Banas sues as an individua and “Paul C
s
al
Castella, FLP”
”
(“fam limited partnership”) is named as a Plaintiff.
mily
p

3

Based on the foregoi the Cou GRANTS t Motion t Dismiss C
n
ing,
urt
the
to
Count I for breach of

1
2

writ contract WITH LEAV TO AMEN to correc the deficie
tten
VE
ND
ct
encies identif by Volc
fied
cano.
B.

3

COUNT II: BREACH OF THE IMPLIED COVENAN OF GOOD FAITH AND FAIR
T
D
NT
DEALING

4

Under Delaware law every cont
D
w,
tract has an i
implied cove
enant of goo faith and f dealing.
od
fair

5
6
7
8
9
10
11

Northern District of California

United States District Court

12
13
14
15
16

Dun
nlap v. State Farm Fire & Cas. Co., 878 A.2d 43 441-42 (D 2005). The implied covenant
34,
Del.
d
requ
uires contrac
cting parties “to refrain from arbitrar or unreaso
fr
ry
onable condu which ha the effect of
uct
as
prev
venting the other party to the contrac from recei
o
o
ct
iving the fru of the bar
uits
rgain.” Id. a 442. The
at
implied covenan is an inter
nt
rpretive device used by c
courts to ana
alyze unantic
cipated developments or
to fi gaps in th contract’s provisions as a way to e
ill
he
a
ensure that th parties’ re
he
easonable ex
xpectations
are fulfilled by implying ter into the agreement to best approximate what the parties would have
f
i
rms
a
o
t
barg
gained had th thought to negotiate the matter. See Nemec v. Shrader, 991 A.2d 11
hey
120, 1126-28
8
(Del 2010); Du
l.
unlap, supra, 878 A.2d at 441. Thus , “where the subject at is
,
t
e
ssue is expre
essly covered
by th contract, or where the contract is intentionall silent as to that subjec the implie duty to
he
e
ly
o
ct,
ed
perf
form in good faith does not come int play.” Da Greytak Enterprises, Inc. v. Maz Motors of
d
n
to
ave
,
zda
o
Am., Inc., 622 A.2d 14, 23 (Del. Ch.) aff sub nom., 609 A.2d 668 (Del. 19
A
(
ff’d
992).3
To state a cause of action under Delaware la for breach of the implied covenan of good
a
aw
h
nt

17
18
19
20

h
ealing, a plain must id
ntiff
dentify a spe cific obligat
tion implied in the contra and alleg
act
ge
faith and fair de
how a breach of that obligat
w
f
tion denied the plaintiff t fruits of the bargain. Kuroda v. SPJS
t
the
.
Hold
dings, L.L.C 971 A.2d 872, 888 (D Ch. 2009
C.,
Del.
9).
Plaintiff have not id
fs
dentified an implied obli
igation that V
Volcano breached, but in
nstead

21
22
23
24

iffs
iden
ntify an oblig
gation expressly covered by the cont
d
tract. Plainti allege th “Volcano breached th
hat
o
he
implied covenan of good fa and fair dealing by f
nt
aith
failing to act in good fait and to use
t
th
e
com
mmercially re
easonable eff
fforts to obta regulatory approval o the OCT S
ain
y
of
System,” wh is the
hich

25
3

26
27
28

De
elaware law is “more contractarian than that of many other states,” meaning tha the legislatu and its
s
y
”
at
ure
cour allow the parties to defi the limits of their oblig
rts
p
ine
gations, and th “parties’ contractual c
hus,
choices are
respected.” GRT, Inc. v. Mara
T,
athon GTF Te
echnology, Ltd 2011 WL 2682898, at * (Del. Ch. July 11,
td.,
*12
.
2011 see also Nemec, supra, 991 A.2d at 1126 (“We m . . . not re
1);
N
must
ewrite the con
ntract to appe
ease a party
who later wishes to rewrite a contract he no believes to have been a bad deal. Pa
c
ow
o
arties have a r
right to enter
into good and bad contracts, th law enforces both.”).
d
he

4

1

seco Mileston to be achi
ond
ne
ieved. Howe
ever, the Ag
greement exp
pressly estab
blished that V
Volcano had
d

2

“to act in good faith and to use commercially reason
a
f
u
nable efforts to cause eac of the Mi
s
ch
ilestones to be
b

3

achi
ieved on or before” the specified dat for each. FAC ¶ 5. Since the goo faith oblig
b
s
te
od
gation is

4

expr
ressly covere by the Ag
ed
greement, a count which implies tha term into th Agreeme is
c
h
at
he
ent

5

dupl
licative.
Based on the foregoi analysis, the Court G RANTS the Motion to D
n
ing
,
Dismiss Coun II for
nt

6
7

brea of the im
ach
mplied coven of good faith and fai dealing WITH LEAVE TO AMEND. Plaintiffs
nant
ir
D

8

mus identify th specific co
st
he
ovenant alleg
gedly breach in such a manner tha the Court c confirm
hed
at
can

9

that such an obligation is no specified in the Agreem itself.
ot
i
ment

10

C.

11

Under Delaware law a fiduciary relationship exists “wh one pers reposes s
D
w,
y
p
here
son
special trust
t

COUNT III: BREACH OF FIDUCIARY DUTY
F
Y

Northern District of California

United States District Court

12

in an
nother or wh a specia duty exists on the part of one perso to protect the interest of another
here
al
s
t
on
t
ts
r.”

13

Wal
l-Mart Stores Inc. v. AIG Life Ins. Co., 901 A.2d 106, 113 (D 2006) (
s,
G
C
d
Del.
(emphasis ad
dded and

14

quot
tation marks omitted). Careful “atte
s
C
ention must b paid to th word ‘special’ lest the statement be
be
he
e
b

15

thou
ught to descr too broa
ribe
adly [the cou
urt’s] concern with relat
ns
tionships wh an elem of trust, as
here
ment

16

com
mmonly unde
erstood, is pr
resent.” McM
Mahon v. Ne Castle As
ew
ssociates, 53 A.2d 601, 604 (Del.
32
,

17

Ch. 1987). “A fiduciary is typically one who is entr
f
t
e
rusted with t power to manage and control the
the
o
d
e

18

prop
perty of anot
ther.” Rich Realty, Inc. v. Potter Anderson & Co
R
v
orroon LLP, CIV.A.09C
,
C-12-

19

273M
MMJ, 2011 WL 743400 at *3 (Del. Super. Feb. 21, 2011) (
0,
.
.
(quoting Wil
lmington Lea
asing, Inc. v.
.

20

Parr Leasing Co., L.P., CIV. A. 1520 1996 WL 752364, at *14 n.19 (D Ch. Dec 23, 1996)) 4
rish
g
C
02,
L
t
Del.
c.
).

21

Whi Plaintiffs allege that they placed special trust in Volcano, nothing in the FAC jus
ile
t
t
,
stifies

22

imposing on Vo
olcano the “e
exacting stan
ndards of fid
duciary dutie
es.” Wal-Ma Stores, su
art
upra, 901

23

A.2d at 114 (“it is vitally im
d
mportant that the exacting standards o fiduciary duties not be extended to
t
g
of
t

24

quot
tidian comm
mercial relatio
onships”). Additionally although P
A
y,
Plaintiffs alle that they were entirely
ege
y

25

depe
endent upon Volcano to develop and sell the OC technolog such dep
n
d
CT
gy;
pendence doe not elevat
es
te

26

4

27
28

Fid
duciary relatio
onships recog
gnized by Del
laware law inc
clude attorney and client, g
y
general partn
ners,
adm
ministrators or executors, gu
uardians, and principals an their agents See Bird’s Const. v. Milton Equestrian
nd
s.
s
Ctr., 1980-S, 200 WL 152895 at *4 (Del Ch. Nov. 16 2001) (citin McMahon supra, 532 A
,
01
56,
l.
6,
ng
n,
A.2d at 605).
Here the parties’ relationship does not fall within any of the limited c
e,
f
categories of relationships to which
Dela
aware courts have previous extended fiduciary duti
h
sly
f
ies.
5

1

an ordinary com
o
mmercial rela
ationship—b
based upon a arms-leng merger A
an
gth
Agreement—
—into a

2

fidu
uciary relatio
onship. Id.
Further, “where a dispute arises from obliga
ations that ar expressly addressed by contract,
re
y

3
4

that dispute will be treated as a breach of contract cl
l
a
o
laim. In tha specific co
at
ontext, any fi
iduciary

5

ms
me
e
bligations wo
ould be forec
closed as
claim arising out of the sam facts that underlie the contract ob

6

supe
erfluous.” Nemec, supra 991 A.2d at 1129. He the oblig
N
a,
ere,
gation Plaintiffs identify is contractu
ual

7

not fiduciary. Plaintiffs’ fid
P
duciary duty claim “mere dresses [
ely
[their] breach of contract claim in
h
t

8

fidu
uciary duties’ clothing.” See Fisk Ve
entures, LLC v. Segal, CI
C
IV.A. 3017-CC, 2008 W 1961156,
WL

9

at *11 (Del. Ch. May 7, 200 aff’d, 984 A.2d 124 (
.
08)
4
(Del. 2009). Under thes circumstan
se
nces, even

10

assu
uming a fidu
uciary relatio
onship existed, the FAC f
fails to alleg such a fidu
ge
uciary duty t was
that

11

brea
ached.
Based on the foregoi the Cou GRANTS t motion to dismiss Co
n
ing,
urt
the
o
ount III for b
breach of

Northern District of California

United States District Court

12
13

fidu
uciary duty WITH LEAVE TO AMEND.
E
D

14

IV.

15
16

CONCL
LUSION
For the reasons set forth above, the Motion t Dismiss is GRANTED WITH LEAV TO
r
fo
t
to
s
VE

AME .
END

17

Plaintiff shall have until August 20, 2012 to file a secon amended complaint.
f
u
t
o
nd

18

der
tes
N
This Ord Terminat Docket Number 13.

19

IT IS SO ORDERED.

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Date: August 6, 2012
6

__
__________
___________
__________
__________
YVON GONZAL ROGERS
NNE
LEZ
UNITED ST
TATES DISTR
RICT COURT JUDGE
T

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27
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